Last week we began alerting traders that they should be watching the YIELD on the 5-year and that bullish equity traders didn't want to see this yield fall below this moving average. This morning we are seeing a rather precipitous drop in this shorter- term YIELD and has us witnessing continued buying in this bond. Again... it has been our observation that this type of activity tells us that market participants have been putting money into bond the last couple of weeks and this is money that is not finding its way into stocks. This along with some of what we've been seeing in the bullish percent data from the NASDAQ-100 and the S&P 500 bullish percent have been giving us the heads up that the market has been playing some defense by selling stocks and buying bonds.
Stock futures are lower this morning with S&P 500 futures (SP01U) down 3 points, NASDAQ futures (ND01U) are lower by 13 and Dow futures (ND01U) are down 1 point. Fair value for the S&P 500 is $9.84. Computer buy programs are set for buying at $11.24 and set for selling at $8.44.
5-year YIELD Chart from 1998 - 1999
I have been trying to compare the current economic climate to that of late 1998 and early 1999. During that time frame, the Fed was aggressively cutting interest rates and trying to stimulate the US economy against the "Asian Flu." While the current economic environment is very much a global nature, the problems the market has been experiencing recently has not just been an Asian impact, but very much a US based slowdown. What a bullish trader in stocks wants to see is for the YIELD on the 5- year (FVX.X) to begin showing some firming around the 50-day moving average like it did in December of 1998 and then begin drifting higher as the market sells the bond and puts that money into stocks, just like it did back then.
If we don't see this happen over the next couple of weeks, I will then have to observe that action as DIVERGENCE and take further preventative action for the PremierMarkets.com profiled portfolio. We've already taken some defensive action by adding some bearish trades to the portfolio, snug up stops and gotten stopped out and have been writing some covered calls. All are strategies a trader or investor can implement on their own accounts to help hedge the decline we've seen the past several sessions.